Safe-Haven Swiss Franc Pegged to the Euro?

The Swiss franc, a stalwart against market turbulence, fell like a rock Thursday, in part on speculation that it could be temporarily anchored to the euro.

The franc skidded against both the euro and U.S. dollar, as well as other currencies, as traders rushed to reposition after a comment from a Swiss National Bank (SNB) official, who said he would not rule out a temporary euro-franc peg.

The Swiss have been battling a dramatic rise in the franc, seen by the world as the safest place to hide out during the current market turmoil. SNB vice chairman Thomas Jordan also was quotedas saying the bank can ease monetary policy further without direct currency intervention.

"It's the old form of verbal intervention. Throw money at the problem and then dazzle with verbosity. They're taking a page from Wall Street," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. He said the SNB official was speaking to reporters and made the comment in response to a question.

"Like all central bankers, they do not deny themselves policy tools. We're skeptical of this," he said. The SNB announced Wednesday that it was increasing retail banks' overdrafts and carrying out foreign-exchange swap transactions to rein in the franc.

Deutsche Bank G-10 currency strategist Alan Ruskin was also skeptical. "It remains difficult to tell how seriously this is being considered, but I continue to believe the broad concept is poorly conceived. An action to enter a peg with the (euro) at this juncture would be analogous to a very strong currency jumping in to the old exchange rate mechanism in the midst of unprecedented turmoil, while probably being left to defend the bands by itself, with limited solidarity from others (in this case the European Central Bank)," he wrote in a note.

The Swiss franc was off about 4.5 percent against the dollar and 4.8 percent against the euro at midday, after a steeper early drop.

"A pegged exchange rate, a band? I don't see why it would be in the ECB's interest. They're buying Italian and Spanish bonds, and now they're going to help out Switzerland? It doesn't smell right to me," Chandler said. "It's triggering a big squeeze. It's forcing long liquidation of Swiss franc, even against the dollar."

Chandler said the Swiss have been successful in their own form of quantitative easing. He points to negative interest rates on the euro/Swiss franc futuresall the way through March 2013, nearly the same period of time the Federal Reservehas targeted to keep U.S. interest rates at extreme lows. The contract reflects the interest rate on three-month deposits offshore.

He noted that the sight deposits on excess reserves at the SNB increased to 120 billion francs (US$157.5 billion) from 30 billion francs (US$39.4 billion), just two weeks ago, and that has pressured rates.

Chandler said the currency move was also the result of the rise in risk assets, and the franc could snap back if stocks resume their selloff, or the French bank rumors appear more credible, or the Swiss deny the consideration of the currency peg.

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